Sanat Vallikappen

Mumbai: Varun Sood, founder and managing partner of Capvent India Advisors, a private equity fund of funds that has been in India since 2003, has a keen eye on the moral hazards associated with parking funds with private equity managers.

And these moral hazards, defined as the prospect of a party (in this case, the private equity firms) insulated from risk behaving differently from the way it would behave if it were fully exposed to that risk, are manifesting itself in India through the constant churn of teams that manage private equity funds.

“We take a conscious decision not to invest in groups that are prone to people leaving regularly,” says Sood, who has so far invested $150 million across 14 funds in India, and says he has another $250 million lined up.

The fund of funds structure of Capvent makes it a limited partner (LP), similar to a pension fund, endowment or family office that invests in a private equity fund. The private equity fund is otherwise called a general partner (GPs), and makes the final decision on where money gets invested for returns.

GPs, especially those such as ICICI Venture and UTI Venture that have been operating in India for many years, have been losing key people regularly, what with the interest in private equity having assumed large proportions and every global firm worth its salt wanting to set up an India beachhead.

In an October 2007 report, knowledge process outsourcing firm Evalueserve estimated that there are 366 private equity and venture capital firms operating in the country, and another 69 that would start operations soon.

This glut of funds has ensured that every player is forced to draw from the limited talent pool available, making it a nightmare for LPs.

For the latter, the individuals, which generally number 5-15 in a GP, are as important as choosing the GP itself. Because, it is individuals’ ability to make prudent investment decisions and returns that drives an LP to a GP.

Any LP who put money into New Silk Route Advisors’ $1 billion fund going by one of its co-founders, Amit Chandra’s credentials, ought to be disappointed now. Because, in less than a year, Chandra has quit the fund and joined Bain Capital to head its India operations.

There are plenty of other examples.

Recently, Aluri Srinivasa Rao, a director at ICICI Venture, and a specialist in the lifesciences segment, was hired by Morgan Stanley for the dedicated team that it’s setting up in India for private equity. With Rao leaving, LPs fear a break in the continuity of vision and growth of investee companies on whose boards Rao sat, representing ICICI Venture.

In mid-2007, ICICI Venture lost another senior member, Jayanta Banerjee, to Lehman Brothers. But before the year was up, Banerjee is said to have got disillusioned with his new employers, and moved back to ICICI Venture to head its corporate and strategic initiatives.

At around the same time as Banerjee moved to Lehman, another of ICICI Venture’s investment director, Sumit Chandwani, was said to be moving to Sequoia Capital. Sources says that Chandwani did in fact join Sequoia Capital, but within days, returned to the ICICI fold. LPs perceive such moves too as disrupting continuity.

A spokesperon for ICICI Venture’s CEO and managing director Renuka Ramnath said she was busy in a meeting to respond to questions on how she explains people movement to her LPs.

“When LPs do their due diligence of GPs, one of the key things they look out for is the stability of the investment team. LPs make sure that the GP provides enough incentives and opportunities for its team members to grow. They ensure that individual interests at a GP are aligned to that of the organisation heshe represents, so that the chances of him leaving mid-way are minimised,” said K Srinivas, managing partner at BTS Investment Advisors, a fund that has been operating in India since 1997.

Ramnath may have a lot of convincing to do if she wants LPs to continue patronising her fund, and make ICICI Venture into a fund with $10 billion under management by 2010, something she has talked about in previous interviews. For LPs, there is no sure shot recipe to remedy the predicament immediately. Private equity has seen management churn and is likely to see much more.

Source : DNA